Chesapeake Energy (CHK, Financial) has experienced one of its best periods in a long time over the last few weeks. Since Feb. 12, shares of Chesapeake have rallied from a low of $1.50 per share to Monday's price of $4.88. According to the SEC, this range puts Chesapeake stock in the category of penny stocks.
Many investors and analysts have their own price thresholds at which they consider a stock to be a penny stock. Some have the threshold at $3 per share while others actually consider only stocks that trade below $1 per share.
Nonetheless, the SEC considers any stock trading at a price lower than $5 per share a penny stock, and this is why Chesapeake should be analyzed from this perspective. When analyzing a penny stock, there are two crucial items to look at besides the normal valuation multiples. They include price volatility and trading volume.
This is because a penny stock can easily spike in price after an insider makes a sizable purchase/sale or when some positive news comes out while trading volume is crucial in determining how genuine a price movement is. Historical volatility can also tell an investor whether to jump at an opportunity and when to invest.
Chesapeake Energy stock has impressive trading volume
Chesapeake Energy is still a big company despite the massive drop in stock price when compared to price levels of two to three years ago. The market currently values the company at just over $3 billion, which makes it a mid-cap stock, from a market capitalization perspective.
Chesapeake stock has an average three-month trading volume of just over 40 million shares of the current float of 569 million. This means that on average Chesapeake stock experiences a trading volume of about 7% of the float.
Despite the recent resurgence in stock price, investors short 204 million shares of Chesapeake in February representing nearly 40% of the float. This was a massive improvement from January when Chesapeake stock had 234 million shares held short by investors.
Therefore, while Chesapeake has impressive trading volume numbers, it looks as if there is a good number of investors who do not believe that the stock has any chance of continuing with the current rally. This means that, when buying shares of the company, it would be unwise to be wooed by the recent resurgent in price and impressive trading volume.
Chesapeake Energy stock has been volatile
Shares of Chesapeake energy currently have a 52-week high of $16.98 per share and a 52-week low of $1.50 per share. That is a massive difference in price over a 12-month period.
On Feb. 3, Chesapeake stock traded at a price of $3.36 per share, but a week later the shares had fallen to trade at a low of $1.63 per share representing more than a 50% drop in stock price.
The stock price later fell to a new multiyear low of $1.50 before rallying back to trade at $5.23 three weeks later. This illustrates a great degree of volatility with no concrete fundamental support for the recent uptrend.
This kind of stock price fluctuation is popular with penny stocks. When this happens, it is always important for investors to look further into the company’s financials to determine what is moving the stock.
As for Chesapeake, there has been the talk of new financing deals that could see the company swap part of its current debt with a new issue of a 1.5 lien debt. The 1.5 lien debt would give the company more time to settle current debt obligations as oil and gas prices continue to recover. Normally, the 1.5 lien debts have longer maturities, providing companies with more time to pay the existing debt holders.
However, these 1.5 lien debts also are tricky and often associated with companies that seek to file for bankruptcy in the near future. The 1.5 lien debts promise to pay holders first in case of liquidation. That’s why they provide longer payment periods.
Chesapeake Energy has already dismissed any talks of filing for bankruptcy, but then again, you can never know where the truth is. Therefore, given the current stock price volatility and the recent emergence of possible new financing deals, Chesapeake stock looks highly unpredictable. The stock price could be very volatile in the foreseeable future.
In summary
Chesapeake Energy stock is a possible value trap and the recent news of possible new financing deals could only serve to make the trap more attractive to some investors. The stock is currently in the category of a penny stock as per SEC rules.
Although penny stocks are often associated with tiny companies, sometimes large companies can be put in this category depending on price, trading activity and availability of information. Price and volatility are what lands Chesapeake in this category.
In addition, while the stock has impressive trading volumes, it might prove to be harder to sell the stock after owning it. This is because, based on recent trading activity, most investors are holding short positions, as demonstrated by the short interest that is in the neighborhoods of 40% of the float.
In theory, few investors would view Chesapeake Energy stock as a "penny stock," but when you look at some of its characteristics, it is worth analyzing it from the perspective of a penny stock before committing to buy.
